Schering-Plough stock plummets

Manufacturing not in compliance with FDA standards

By

StephanieO'Brien

KENILWORTH, N.J. (CBS.MW) - Shares of Schering-Plough fell about 15 percent on Friday after the drug maker said its largest U.S. manufacturing plants are out of compliance with U.S. Food and Drug Administration rules.

As a result, the drug maker
SGP, -1.31%
has to suspend various production lines, leading to limited output of many of Schering-Plough's pharmaceutical, over-the-counter and animal-health products. The suspension will hurt earnings in the first quarter and the 2001 fiscal year. Schering-Plough stock fell $7.07, or about 15 percent, to $41.25.

In a particularly troublesome setback for the company, Schering-Plough also said the U.S. Food and Drug Administration wouldn't approve Clarinex, a new version of its top-selling antihistamine Claritin, for sale until the company resolves FDA concerns about its production practices. Analysts estimate that sales of the drug, which got an "approvable" letter from the agency last month, could reach about $2 billion.

Late Thursday, Schering-Plough issued a press release that said FDA inspections found that plants in New Jersey and Puerto Rico aren't in compliance with federal standards on production controls and procedures.

The company asserted it's "confident" all prescription and over-the-counter products on the market are "safe and effective and that the needs of all patients will be met."

Schering-Plough said first-quarter per-share earnings are likely to be as much as 15 percent lower than the 42 cents a share it reported in the same quarter last year. Wall Street expected the drug-maker to earn 48 cents in the first quarter and $1.90 in 2001, according to a First Call/Thomson Financial survey of 27 analysts.

The company said some of the issues affecting first-quarter results also are expected to hurt earnings for the year. How much of an impact it has will depend how fast Schering-Plough solves its manufacturing problems.

Schering-Plough said the manufacturing and control issues have led to lower U.S. sales of certain products, which will result in lower-than-expected first-quarter and fiscal 2001 sales and earnings. It didn't specify the products. The company said some of the issues affecting first-quarter results also are expected to hurt earnings for the year. How much of an impact it has will depend how fast Schering-Plough solves its manufacturing problems.

"Our highest priority is and always has been the well-being of patients who use our products," the company's chairman, Richard Jay Kogan, said in a statement. "I am taking full responsibility for resolving these matters in a timely manner and securing FDA's confidence in the quality and reliability of our manufacturing systems and controls."

Wall Street responds

Analysts expressed frustration with a lack of detail provided by the company. They responded with a host of downgrades and lowered earnings estimates.

"While management did disclose that it expects the first quarter to be as much as 15 percent below last year's earnings per share of 42 cents, it would not comment on how long this problem could last," Wasserstein-Perella's Adam Greene said in a note to clients Friday.

"Therefore, without any help from the company it is impossible for us to know the severity of the issues or which products are most impacted," Greene said. "Moreover, even if the company is able to resolve these issues in a relatively rapid manner, it is uncertain how long the FDA would take to re-validate the plants," he said.

As a result, Greene said it's safe to assume that manufacturing woes will plague Schering-Plough for the rest of this year. More importantly, he said, it will most likely prevent Schering-Plough from launching Clarinex this spring and "greatly reduces the likelihood of an introduction ahead of the fall allergy season."

Greene lowered his rating on the stock to "hold" from "strong buy."' He also cut his first quarter earnings estimate to 37 cents from 48 cents, representing a 12 percent decline. He cut his 2001 estimate to $1.53 a share from $1.91. Greene also cut his price target to $40 a share from $65 a share.

"Picking a bottom in this stock is difficult because we have no indication as to how long this issue will plague the company," Tighe said in a note to clients. "Therefore, our earnings estimates may be at risk," he said.

Bear Stearns analyst Joe Riccardo reduced his forecast "noting there is very little information to base estimates on at this juncture." Claritin is manufactured at the factories in question, and so its sales are likely to be hurt, he said.

Schering-Plough said the manufacturing and control issues have led to lower U.S. sales of certain products, which will result in lower-than-expected first-quarter and fiscal 2001 sales and earnings. It didn't specify which products.

Schering-Plough blamed its inability to ship products in part on efforts to comply with the FDA's requirements. The company hired consultants to review manufacturing practices after it ran into problems in 1999 involving aerosol inhaler products.

Even after working on remedies, the company said the FDA is calling for "further improvements."

Schering-Plough said it plans to spend more than $50 million in new equipment, process and system improvements. It also plans to add hire more staff for quality control and compliance.

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